Public Health Care Option & Competition

There may be compelling arguments for the inclusion of a public plan in health care reform legislation, improving private insurance through competition is not one of them. Unfortunately it is one that the Obama administration and some on the left have used in making the case for a public insurance plan. Obama repeated this notion of a public plan improving private insurance through competition during his visit to Green Bay.

Econ bloggers Tyler Cowen and Megan McArdle both have cast doubt on the likelihood of this improved private insurance through public competition. Primarily due to the fact that any public plan will likely attract those with the greatest medical costs. Removing these people from private insurance rolls should improve the bottom lines of private insurers, but I don't see how it improves private insurance itself.

First, here's Cowen (he ends in his usual thoughtful way, and that is his emphasis):

in many cases the public plan is mainly providing insurance to high-risk customers. There's nothing wrong with that (and indeed it is a major policy goal), but the resulting equilibrium needn't much improve the performance of private health insurance. I file this argument under "not yet established."

McArdle goes one step further to say that healthy people will leave private insurance and go without. Turning to the public option when and if a serious illness arises:

But I think that in many places, at least, the state system is going to find it hard to attract low-cost patients. It seems to me that given the existence of a state program that will not turn patients away, the optimal behavior for someone who is currently basically healthy is not to buy it. Buy some super-cheap catastrophic plan to deal with a car accident or similar, and then enroll in the public plan if and when you get cancer or something longer term.... if the public plan exists, gambling actually becomes more practical. Contra Tyler, I expect that...[a] strong [public] plan would actually hurt private plans as some of their healthiest, youngest patients made the rational decision to join the ranks of the uninsured.